March 29, 2024

Jocuri

Mad about real estate

The Good and the Bad in Lease to Own Agreements

For some, buying a home is difficult for several reasons. One, cash is strapped for other projects and basic necessities. Two, credit is bad and they cannot get a good mortgage. Three, the house they want is not for sale.

On the other hand, some homeowners find it difficult to sell their homes. No matter how beautiful the house for sale is, still it has become a challenge for them to find a buyer. There have been several dogmas formulated to explain such difficulty. And it all boils down to one thing: most buyers are not qualified to purchase a home.

At times like this, when the seller and the buyer both have difficulties, there can be only one option: Lease to own. 

Understanding Lease to Own

Lease to own is not a difficult concept. It is just a lease with an option for purchasing in the future. It is formalized through a contract where details of the agreement are stated like the amount of the option fee, the rent premium, the expiration date of the offer, the purchase price and other basic and contingent stipulations in a lease contract.

Looking at it, lease to own is a clever solution to home buying and home selling in rough real estate market. Both parties, the buyer and the seller, would definitely benefit from it. However, before going into this contract, it is important to realize the good and the bad of this transaction.

In this section, you will see how lease to own can affect the seller and the buyer:

Seller

Good

  • For a slow real estate market, it is a guarantee that the house will be sold given they find a determined buyer.
  • Home price will not go down further because it can be locked-in as stipulated in the contract.
  • If the buyer cannot purchase the property at a specified time, the rent premium and the option fee becomes an additional income.
  • They can protect their interest by stipulating a non-assignable clause in the agreement.

Bad

  • If the market improves, houses with locked in price cannot be raised to level with the market value.
  • If the renter is always late in payments, it could risk the mortgage of both the new and old homes of the seller, if he or she is counting on the rental income.

Buyer 

Good

  • Having a bad credit history is not a hindrance from trying to buy the house.
  • People with bad credit, can use this transaction to prove improvements in the credit standing.
  • In case real estate situation improves, the lucky ones will be able to pay for the house at an affordable price
  • They can build equity even by paying the rent and option fee.

Bad

  • Rent is expensive and if payments are constantly late, this might not be good for the credit performance of the buyer (with bad credit record); that could in turn forfeit the chances of getting mortgage upon the purchase date.
  • Late payment would usually lead to forfeiture of rent credited to down payment.